challenges of Clean development mechanism in nigeria

by ademoroti, mayowa simeon, BS

Abstract (Summary)

One of the most pragmatic ways of encouraging and improving a healthy environment is by facilitating mechanisms through which the world can come together as one and decisively face the reality of climate change effects on Earth without inhibiting the growth and economic development of other developing economies. An example of such mechanisms was birth through Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC) - The Clean Development Mechanism (CDM).
This paper seeks to give an overview of the challenges faced by Clean Development Mechanism, its implementation and development in Nigeria as an incentive to facilitate speedy abolishment of gas flaring, that has been taking place for over 40 years in the country and yet the energy sector still suffers, as against the flipside of no incentive by the expiration of the gas flaring deadlines given by the Federal Government of Nigeria.

CERTIFICATIONI certify the content of the assignment to be my own and original work and that all sourceshave been accurately reported and acknowledge, and that this document has notpreviously been submitted in its entirety or in part at any educational establishment.

_15902331_______________________SIGNATUREID number for e-mail assignmentsVIR KANTOORGEBRUIK / FOR OFFICE USEDATUM ONTVANG:DATE RECEIVED :

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A RESEARCH ESSAY

ONCHALLENGES OF CDM IMPLEMENTATION ANDDEVELOPMENT IN NIGERIA

BY

ADEMOROTI SIMEON MAYOWA

STUDENT NO.: 15902331

NOVEMBER 30, 2009.

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TABLE OF CONTENTS

COVER PAGE ………….…………………………………… 1

TOPIC…………………..………………………………………… 2

TABLE OF CONTENT……………………………………………. 3

INTRODUCTION……………………………………………… 4

WHAT IS CDM? …………………………..…………………… 5

WHY CDM IN NIGERIA?.............. ………………………….… 6

IS THERE ANY POTENTIAL FOR CDM IN NIGERIA?....... 7

WHY IS NIGERIA LAGGING IN CDM?.....………………… 8

WHAT ARE THE CHALLENGES OF CDM IMPLEMENTATIONAND DEVELOPMENT IN NEGRIA?..................................... 8

CONCLUSION………………………………………………….. 12

REFERENCES………….……………….………………………. 12

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INTRODUCTION

In times past, news about earthquakes, hurricanes, landslides, and volcanic occurrencesare most prevalent in certain parts of the world until more recently. The world has hadcause to fight ozone layer depletion and deforestation also in recent years. Now in the lastfew decades, CO2 which is part of Greenhouse Gases emission has given cause forconcern all over the world. Greenhouse Gases (GHG) are gases responsible for climatechange. The GHG gases considered under Kyoto Protocol include: CO2; SF6; PFCs; CH4;N2O and HFCs.

The threats of climate change experienced all over the world, has made man to come intorealities of his over dependence on and exploitation of natural resources. The occurrenceof Greenhouse Gas emission as a result of demand for energy and prolific humanactivities eventually led world leaders to come together in order to address climatechange issues. As discussed by Nasiru Idris Medugu in his letter to Daily Trust from theUniversity of Teknologi, Malaysia, on the effect of climate change in Nigeria, scientificstudies have shown rapid disappearance of snows, increase in average globaltemperatures, drying up of lakes and dams with fewer water supplies for agriculturalproduce and hydropower generation. In Africa, off seasons rains throwing growingseasons out of orbit, incessant flooding and persistent droughts are a few of the effects ofclimate change confirmed following the release of the 4th IPCC Assessment report onAfrica which Nigeria is part of.

One of the most pragmatic ways of encouraging and improving a healthy environment isby facilitating mechanisms through which the world can come together as one anddecisively face the reality of climate change effects on Earth without inhibiting thegrowth and economic development of other developing economies. An example of suchmechanisms was birth through Kyoto Protocol of the United Nations FrameworkConvention on Climate Change (UNFCCC) - The Clean Development Mechanism(CDM).

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This paper seeks to give an overview of the challenges faced by Clean DevelopmentMechanism, its implementation and development in Nigeria as an incentive to facilitatespeedy abolishment gas flaring, that has been taking place for over 40 years in thecountry and yet the energy sector still suffers, as against the flipside of no incentive bythe expiration of the gas flaring deadlines given by the Federal Government of Nigeria.

What is CDM?

The Clean Development Mechanism is a market mechanism under the Kyoto Protocoltargeted at reducing GHG emissions in a cost effective way and still maintain sustainabledevelopment in host countries by encouraging energy-efficient, capital and technologytransfer into those countries (UNFCCC 2005:29).

According to Joel D. Carlman in his article titled Jaunty Expansion or Mortal Decline –The Clean Development Mechanism’s Moment of Truth, “CDM is an important systembecause it is designed to bridge the gap between industrialized countries which areresponsible for the majority of historical greenhouse gas (GHG) and emissions and thedeveloping world which is expected to be the major source of future emissions”.

Under the Kyoto Protocol, three flexible mechanisms were provided; One, in whichAnnex 1 parties (mostly developed countries) with mandatory emissions limitations or“emissions caps” were called to reduce, of the six GHG emissions by at least 5 % belowthat of 1990 taken as base year level within the first commitment period (2008 – 2012).Two, in which non-annex 1 party (mostly developing countries) with no emissionsreductions limitations can also contribute towards global GHG emission reductionthrough CDM project hosted in such countries and carbon credits generated in suchprojects are purchased by Annex 1 parties in addition to sustainable developmentcontribution in such host countries. Three, in which one annex 1 party assists anotherannex 1 party in implementing GHG emission reduction projects e.g. JointImplementation (JI) and/or the credits (carbon) generated or carbon caps are traded in anemission trading scheme e.g. European Union Emission Trading schemes (EU ETS).

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Why CDM in Nigeria?

The Nigerian economy which is part of the Sub Saharan African economy is mainlydriven by Oil. Hence the activity surrounding its exploration, exploitation, generation andproduction account for a certain percent of CO2 emission particularly through gas flaring.In the light of gas flaring health implications and negative environmental impact, theFederal Government of Nigeria has put a deadline for the abolishment of gas flaring since1984 and thus gas flaring became illegal in Nigeria. Despite the illegality of gas flaring itis very sad that this illicit act has not been stopped.

On one hand the Oil and Gas sector drives the economy and on the other hand theagricultural sector contributes some percentage of the Nigerian GNP and on which theemployment of majority of the rural populace is hinged. The devastating socioeconomicconsequences of climate deteriorations make the consideration of Kyoto Protocolimperative to the Nigerian Government. Despite the vulnerability of the Nigerian oilsector to the negative short term effect on economic development being the 8th largest oilproducer in the world and the 9th largest gas deposit, the disproportionate impact onagriculture produce and increasingly desertification and incidence of disease has induceda very urgent attention from the stake holders.

Consequently, the effect of incessant gas flaring on the environment manifested in theimmediate communities in the Nigerian coastal regions with extreme weather changes.Local communities relying mainly on agriculture can no longer survive on agric produce.Food shortages and diseases related to malnutrition are evident in the villages around thisregion. Acid rain, soot particles and corroded building are resultant effect of this abuse.

Against this backdrop, Nigeria ratified and accepted the Kyoto Protocol on 10thDecember, 2004. This has given her a platform for participation in the carbon market anda safe haven from the dilemma of gas flaring and deteriorating agricultural productivity.

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Is there any potential for CDM in Nigeria?

During the International Renewable Energy Conference (IREC) 2009 in Nigeria, theconveyer, Mr. Bolade Soremekun, the CEO of Bas Associates Consulting claimed thatNigeria has the highest equivalent of CO2 gas abated in terns of total volume in Africa.Although South Africa and Egypt are leading in terms of number of projects registered sofar under CDM, Nigeria by the first two projects registered has the highest since theprojects were on gas flaring which is methane and 21 times GHG effect of CO2. He alsosaid that the country’s potentials is large as identified by expert basically due to being thelargest producer of oil and associated gas but which has been flared for close to 50 yearsof exploration. The environmental impact of more than 45 years of oil exploitation andgas flaring has made the country the only country in the world with the highest dailypollution of CO2 into the atmosphere.

It is also very critical to note the economic implications of gas flaring aside from healthimplication and environmental degradation. A recent report showed that an estimate ofabout $2.5 billion represent an annual economic loss to the country.

Environmentally, the World Bank has attributed the highest sources of Greenhouse Gasescontribution to Earth’s atmosphere in the sub-saharan Africa to Nigeria. This camedespite no economic benefit nor any improvement or contribution to the decaying energysector of Nigeria.

Yet with the adoption and ratification of CDM by the Nigerian government, the countrystill lags in its implementation and development. One would naturally assume that themultinationals involved in gas flaring will willingly embrace CDM in other to improvethe condition of the generality of its host communities. Also it is embattling to sit back asNigerians and expect gas flaring to die a natural death when carbon credits can beemployed to the advantage of the betterment of the teeming Nigerian coastal regionpopulace. Faced with the numerous benefits that can be derived from CDM as against thecountry’s former state of vulnerability, it is worth investigating, the barriers to thedevelopment and implementation of CDM in Nigeria.

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Why is Nigeria lagging in CDM implementation and development?

The World Bank’s estimates have clearly shown that the African countries have failed tolive up to the great emission reduction credits potentials within its confines. With morethan 3,200 clean energy projects and 740 million tons of GHG reduction per year, thecontinent still has just 2% share of global CDM pipeline.

In 2000, studies showed that over 3-5 billion standard cubic feet (scf) of associated gaswas produced and more than 70% was burnt off. This made Nigeria the world’s largestgas-flarer with about 2 billion standard cubic feet a day being flared.

The challenges of CDM implementation and development in Nigeria aresummarized as follows;

Access to conventional finance: The business math behind CDM projects as enunciatedunder Kyoto Protocol is that carbon finance can only turn borderline projects into viableones as a result of GHG reduction. Hence CDM, according to Durando Ndongsok of FirstClimate in his write up on CDM IN AFRICA - Facing the hurdle of conventionalFinance, is not “a panacea for projects that make no financial sense at all”.

The basic math calculations of any CDM project must give an internal rate of return(IRR) that is potentially viable enough to lure investors. What carbon finance is toachieve is the increase in such IRR by for example a 2 % more in order to raise thethreshold of profitability and therefore favor implementation of such a project.

As simple as the case may look, investigation has shown that access to conventionalfinance is one of the bane of the development of CDM in Africa as also in Nigeria. Theunderlying factor responsible is attributed to economic viability of most ideas which arenot bankable projects.

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Awareness of most Nigerian financial institutions: Project developers in pursuit of theabove mentioned views have come to develop a notion that most banks in Nigeria do notknow what CDM is all about. This led to a sampling of most banks in the country and itshowed that most do not have any idea of what climate change, Greenhouse Gases andCDM is all about. According to Bolade Soremekun statement during IREC 2009, he saidthat “despite all the local and international media reports and features, meetings,workshops, you will hardly find a bank with an Environment/Climate Change/RenewableEnergy Desk in Nigerian banks”. This shows that something is fundamentally not right.

The underlying course of any Foreign Investment in any project, as in the case of CDM,is the acute interest, devotion, commitment and understanding on such project by thelocals which is not evident in this case in Nigeria. Institutional developers have thepotential to develop carbon assets but it has to be with the collaboration of the Nigerianorganizations.

Although the banks have few projects registered or in the offing, those projects are onlyregistered on the basis of the usual loans and project finance but not on the basis ofprovision of sophisticated financial projects such as required and eligible under CDM.

Lack of Capacity building: One of the major barriers to CDM development in Nigeria isthe lack of viable project with respect to the underlying business math and adequateknowledge base. No investor will be attracted by just any great idea without the basicstudy done on viability.

In a recent World Bank study focusing on low-carbon energy in sub sahara Africa, over750 CDM projects opportunities were identified in Nigeria. And from this study, slightlyover 100 million tCO2e of GHG emission reduction can be generated at the prevailingglobal carbon market price of $12.5/tCO2e. This will amount to over $1.25 billion carboncredits sales if these projects were implemented. Also in addition to this implementationis the possibility of over $18 billion worth of clean energy technology transfer to theNigerian economy annually. But the complexities associated with CDM projects

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registrations, validation and implementations processes needs to be addressed by thestakeholders in this fields.

In capacity building, country specific barriers to CDM development such as pre-project,mid-project and launch issues also need to be redress adequately. For example,inadequate knowledge base, non-existing support services and government bottlenecksare most prevalent barriers as identified by Professor Felix B. Dayo in his paper.(a CDMmethodology expert in the Preparatory Assistance to 10 Francophone African countrieson CDM – A UNIDO funded program YA/RAF/05/005/11-53.

The need for active participation of stake holders such as the government in capacitybuilding cannot be over emphasized which include the provision of adequateinfrastructure by the government among other things.

Perception of host countries and policy barriers: The perception of internationalinvestors of Nigeria to be very risky for investment is considered to be of primeimportance in CDM development barriers considerations. The Niger Delta unrest playsanother role in driving home these perceived beliefs of outsiders. Although the risk inCDM revenue accounts for only 20% of the overall revenue, the expected growth inCDM development is absent as most institutional investors are wary of investing.

There is a need therefore for government to come up with regulatory policies that willensure the safety of potential investors. The need to revamp the existing nationalregulatory framework to promote and protect carbon credit investment and projectfinance is also very necessary and pivotal to the growth of CDM in Nigeria.

The complexities of CDM processes and technical framework: The aforementionedcomplexities of CDM project requirements for eligibility under the Kyoto protocol alsoacts as a deterrent to CDM implementation and development in Nigeria. For instance,there is a debate on going the debate on whether gas flaring will no longer qualify as aCDM project since there is government regulation for its stoppage. Therefore, with the